Federated Hermes, Inc.

Ladies and gentlemen, and welcome to the Federated Hermes Q2 2022 Analyst Call and Webcast. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ray Hanley, President of Federated Investors Management Company. Sir, the floor is yours.

Good morning and welcome. Leading today's call will be Chris Donoghue, Federated CEO and President, Federated Hermes CEO and President, and Tom Donoghue, Chief Financial Officer. And joining us for the Q&A are Sacher Nasebi, who is the CEO of Federated Hermes Limited, our international business, and Debbie Cunningham, Chief Investment Officer for the money markets. During today's call, we may make forward-looking statements And we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review our risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray. Good morning, all. I will review Federated Hermes' business performance. Tom will comment on our financial results. Last week, we proudly announced the agreement to acquire C.W. Henderson and Associates, Inc., a Chicago-based registered investment advisor with more than three decades of experience specializing in the management of tax-exempt municipal securities in SMA products. C.W. Henderson manages approximately $3.6 billion in assets. The expected addition will enhance and complement our existing muni team and strategies where we manage about 13 billion at the end of the second quarter. It will also enhance our overall SMA business where we currently manage about 26.5 billion in 35 equity and fixed income strategies. The transaction is expected to close in the third quarter And we welcome all of the employees of C.W. Henderson to Federated Hermes and look forward to working together to develop growth opportunities and to continue to provide outstanding performance and customer service. Turning now to Q2. In a quarter that presented challenging markets across asset classes, our business mix enabled Federated Hermes to end the quarter with an increase in both total assets and revenues as growth in money market assets offset decreases in long-term assets. Looking first at equities. More than 90% of the decrease in assets during Q2 was due to market losses and the impact of foreign exchange rates. Equity total net redemptions were $969 million. This included approximately $1.1 billion in institutional separate account redemptions by BTPS. Our equity mutual funds and SMAs produced combined net sales of just under $600 million. These net sales were driven by the strategic value dividend strategy. The domestic strategy had Q2 net sales of about $1.9 billion. with both the fund at $1 billion and the SMA at $900 million producing solid net sales. The Strategic Value Dividend Fund was recently highlighted in a Wall Street Journal article as the top fund among the 32 out of 1,342 actively managed U.S. stock funds to finish the rolling 12-month period ending with Q2 in positive territory. based on Morningstar data. The article further noted that the fund was the only one with double-digit positive returns for that period. We saw Q2 positive sales in 16 equity fund strategies, including several international strategies such as International Strategic Value Dividend, Asia X Japan, International Equity, and SDG engagement. Net redemptions were concentrated in growth strategies, about $955 million, reflecting difficult market conditions for these strategies. We continue to emphasize asset classes and strategies that have responded well in past inflationary periods, including dividend income, international, emerging markets, and value strategies. We're also expanding our equity product line, including the recent launch of a biodiversity equity fund in collaboration with London's Natural History Museum. The fund invests in companies that are helping to preserve and restore biodiversity. Our equity fund performance at the end of the second quarter compared to peers was solid, using Morningstar data for the trailing three years at the end of Q2, 57% of our equity funds were beating peers and 29% were in the top quartile of their category. For the first three weeks of Q3, combined equity funds and SMAs had net redemptions of 50 million. We had 16 equity funds with positive net sales in the first three weeks of July, including strategic value dividend, Asia X Japan, MDT small cap core and MDT small cap growth, and international strategic value dividend, among others. Now to fixed income. Q2 saw net redemptions of about $2 billion, down slightly from Q1. Fixed income separate account net sales of $1.8 billion, were offset by 3.8 billion of fund net redemptions. Fixed income separate account net sales were driven by multi-sector strategies. Within fixed income funds, net redemptions of about 1.4 billion occurred in the three ultra-short funds. In addition, high yield funds had about 900 million of redemptions. Most categories of bond funds had net redemptions, reflecting another quarter of difficult market conditions. Even so, we had 11 fixed income funds with positive net sales in the second quarter, including capital preservation, adjustable rate, conservative muni micro short, climate change high yield credit, inflation protected securities, among others. Regarding performance, At the end of the second quarter, and using Morningstar data for the three trailing years, 66% of our equity funds, of our fixed income funds, were beating peers, and 22% were in the top quartile of their category. For the first three weeks of the third quarter, fixed income funds and SMAs had net redemptions of about $524 billion. Again, mainly from the ultra-short funds, $256 million, and high yield of $172 million, each trending better. During this same period, however, we had 14 fixed income funds with positive net sales led by municipal high-yield advantage fund, total return bond fund, and conservative bond municipal micro shorts. In the alternative private markets category, net sales of 25 million included positive sales in real estate, fruit and bear, MDT market neutral, and trade finance. These, however, were largely offset by net redemptions in absolute return credit, infrastructure, private equity, and unconstrained credit. We recently closed the second vintage of our European direct lending private market strategy with nearly $600 million of committed funding. Of the 19 investors who made these commitments, 13 were new investors. We expect these fundings to occur over the next 9 to 12 months. We launched our fifth vintage of PEC, P-E-C, our co-invest private equity structure in 2021. We were pleased to hold our first closing in the fourth quarter of 21 with $350 million. We held our second closing last month, adding a significant Korean institution and bringing our total raise to $401 million. Due to demand, we will continue to market PEC 5 for the remainder of 2022. We recently launched our third vintage of the Horizon Private Equity Fund with commitments so far of $1.05 billion, including $1 billion from BTPS as we announced this past May. We begin Q3 with about $2.4 billion in net institutional mandates yet to fund into both funds and separate accounts. About $1.9 billion of this total is expected to come into private market strategies, including direct lending, $900 million, private equity, $500 million, and unconstrained credit, $500 million. Now moving to money markets. Assets increased about $19 billion in the second quarter compared to the first quarter, with nearly all of the growth coming from money market funds. The funds benefited from higher yields from continued elevated liquidity levels in the financial system. Money funds also benefited from higher yields relative to deposit alternatives. Our money market mutual fund market share, which includes subadvised funds, was about 7.3% at the end of the second quarter, up from 6.9% at the end of the first quarter. With the recent increases in short-term interest rates, money fund minimum yield-related waivers have nearly ceased. We continue to believe that the higher short-term rates will benefit money market funds over time, particularly as compared to deposit rates. Taking a look at recent total assets, managed assets were approximately $631 billion, including $436 billion in money markets, $82.5 billion in equities, $88 billion in fixed income, $21.5 billion in alternative private markets, and $3 billion in multi-asset. Money market mutual fund assets were at $296 billion.